Halifax Hospital Medical Center d/b/a Halifax Health. Financial Report September 30, = McGiadrey Assurance Tax Consulting

Transcription

1 Financial Report September 30, 2013 = McGiadrey Assurance Tax Consulting

2 Contents Independent Auditor's Report Management's Discussion and Analysis (Unaudited) Financial Statements: Statement of net position Statement of revenues, expenses and changes in net position Statement of cash flows Statement of fiduciary net position Statement of changes in fiduciary net position Notes to financial statements Required Supplementary Information: Unaudited schedule of funding progress- Halifax Pension Plan Unaudited schedule of funding progress- Halifax Insurance Subsidy OPEB Unaudited schedule of funding progress- Halifax Implicit Rate Subsidy OPEB Additional Information: Schedule of net position - obligated group Schedule of revenues, expenses and changes in net position - obligated group Note to schedules- obligated group

3 . cgi.dr.y llp McGiadrey Independent Auditor's Report To the Honorable Commissioners of the Board Halifax Hospital Medical Center Daytona Beach, Florida Report on the Financial Statements We have audited the accompanying financial statements of the business-type activities, the aggregate discretely presented component units, and the aggregate remaining other fund information of Halifax Hospital Medical Center ("Halifax Health"), as of and for the year ended September 30, 2013, and the related notes to the financial statements, which collectively comprise Halifax Health's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of Halifax Management System, Inc. ("HMS"), a discretely presented component unit, which statements reflect total assets constituting approximately 15% of the aggregate discretely presented component units' total assets at September 30, 2013, and total revenues constituting approximately 5% of the aggregate discretely presented component units' total revenues for the year then ended. We also did not audit the basic financial statements of Halifax Health's fiduciary activities as of and for the year ended September 30, 2013, as presented on pages Those statements were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for HMS and Halifax Health's fiduciary activities, is based solely on the reports of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to Halifax Health's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Halifax Health's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, based on our audit and the reports of other auditors, the basic financial statements referred to above present fairly, in all material respects, the respective financial position of the businesstype activities, the aggregate discretely presented component units, and the fiduciary activities of Halifax Health as of September 30, 2013, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America.

4 Emphasis of Matter As discussed in Note 13 to the financial statements, Halifax Health is the subject of an investigation by the Office of Inspector General (OIG), U.S. Department of Health and Human Services concerning certain claims that were submitted to Medicare and arose from a qui tam action. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that Management's Discussion and Analysis on pages 3-10 and the required supplementary information on pages be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Supplementary Information Our audit was conducted for the purpose of forming on opinion on the financial statements that collectively comprise Halifax Health's basic financial statements as a whole. The accompanying supplementary information on pages is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The other supplementary information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, based on our audit the other supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued, under separate cover, our report dated December 6, 2013, on our consideration of Halifax Health's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Halifax Health's internal control over financial reporting and compliance. Fort Lauderdale, Florida December 6,

5 Management's Discussion and Analysis (Unaudited) Year Ended September 30, 2013 INTRODUCTION This section of the Halifax Hospital Medical Center (the "Medical Center") 's annual financial report provides an overview of the organization and management's discussion and analysis of financial performance and results for the fiscal year ended September 30, This analysis should be read in conjunction with the accompanying basic financial statements. The current enabling act of the Medical Center was passed by a special act of the Florida Legislature as Chapter , Laws of Florida (the "Act"), which codified all prior laws that established the Medical Center as a special taxing district, a public body corporate and politic of the State of Florida. The Medical Center was originally created in 1925 under the name Halifax Hospital District by Chapter , Laws of Florida, The Medical Center's Board of Commissioners (the "Board") is empowered to levy ad valorem taxes for operating expenses, capital outlays, and other purposes. Pursuant to the Act, the Medical Center has all the powers of a body corporate, including, but not limited to, the power to establish, construct, operate, and maintain such hospitals, medical facilities, and healthcare facilities and services for the preservation of the public health, for the public good, and for the use of the public; the power to enter into contracts; borrow money; establish for-profit and not-for-profit corporations; the power to acquire, purchase, hold, lease, and convey real and personal property; and the power of eminent domain. The Medical Center's geographic territory is primarily northeastern Volusia County, Florida, including the cities of Daytona Beach, Ormond Beach, Holly Hill, Port Orange, Deland, Deleon Springs, Oak Hill, Orange City, Osteen, Edgewater, New Smyrna Beach, Pierson, Seville, Debary, Deltona, Lake Helen, Palm Coast, Flagler Beach, and Bunnell. The Medical Center owns and operates three inpatient hospital facilities under one license. The main campus of the Medical Center, located in Daytona Beach, is the inpatient referral center which includes a Level II neonatal intensive care center, a Level II, state-certified trauma center offering open-heart surgery, neurosurgery, inpatient rehabilitation and other specialty inpatient and outpatient services. The Port Orange campus, located ten miles south of the main campus, is a community hospital providing a broad range of services to the residents of Port Orange and southeast Volusia County. The Halifax Behavioral Services (HBS) campus, two miles north of the main campus, provides inpatient and outpatient child, adolescent, and adult psychiatric services. The Medical Center is licensed by the Agency for Health Care Administration (AHCA) to operate with 764 beds and 33 bassinets. The licensed beds by location are set forth in the table below: Main campus Port Orange campus HBS campus Total Licensed Beds by Location In addition to its inpatient facilities, the Medical Center owns and operates outpatient centers in Daytona Beach, Port Orange, and Ormond Beach. 3

6 Management's Discussion and Analysis (Unaudited) Year Ended September 30, 2013 The Medical Center has established not-for-profit corporations (the "component units" or the "affiliates") to assist in carrying out its purpose to provide health care and related services to the community. The component units are legally separate organizations for which the Medical Center is financially accountable and the nature and significance of their relationship to the Medical Center are such that exclusion would cause the Medical Center's financial statements to be misleading or incomplete. The component units of the Medical Center are: East Volusia Health Services, Inc. ("EVHS") HH Holdings, Inc. ("Holdings") Halifax Healthy Families Corporation d/b/a Healthy Communities ("Healthy Communities") Halifax Hospice, Inc. Hospice of Vol usia/flagler ("Hospice") Halifax Management System, Inc. ("HMS") Halifax Medical Center Foundation, Inc. ("Foundation") Halifax Staffing, Inc. ("Staffing") Patient Business & Financial Services, Inc. ("PBFS") Volusia Health Ventures, Inc. d/b/a Volusia Health Network ("VHN") EVHS, Holdings, Healthy Communities, Staffing, and PBFS are considered blended component units of the Medical Center and their financial results are blended with the Medical Center in the accompanying financial statements. Hospice, HMS, Foundation, and VHN are considered discrete component units and are presented in aggregate in a separate column in the financial statements. See Note 1 of the audited financial statements for a description of each component unit and combining schedules. The Medical Center together with all of its component units is referred to as "Halifax Health." OVERVIEW OF THE FINANCIAL STATEMENTS This annual financial report includes the independent auditor's report, management's discussion and analysis, and the basic financial statements of the Medical Center. The basic financial statements are intended to describe the net position, results of operations, sources and uses of cash, and the capital structure of the Medical Center. Fiduciary fund statements for the pension trust fund are also provided as part of the basic financial statements. The basic financial statements include notes providing detailed information for select accounts and transactions. In addition to the aforementioned content, the annual financial report includes required supplementary information composed of unaudited schedules of funding progress for the Halifax Pension Plan, the Halifax Insurance Subsidy and the Halifax Implicit Rate Subsidy postemployment benefit plans. Schedules of net position and revenues, expenses, and changes in net position are included as additional (supplementary) information for the Obligated Group, which is comprised of the Medical Center and Holdings. 4

7 Halifax Hospital Med ical Center Management's Discussion and Analysis (Unaudited) Year Ended September 30, 2013 NET POSITION AND CHANGES IN NET POSITION Net position is an indicator of the financial health of an organization. Increases in net position over time indicate that the financial condition is im proving while decreases in net position over time signify a declining financial condition. A comparative summary of the financial condition of the Medical Center and the aggregate of its discrete component units is presented below: Condensed Statements of Net Position (In thousands) Discrete Halifax Discrele Halifax Medical Component Health Medical Compcnent Health Center Units Total Center Units Total Current assets $ 268,799 $ 86,919 $ 355,718 $ $ 70,680 $ Assets whose use is limited 167,454 8, , ,505 8, ,038 Capital assets, net 340,918 35, , ,792 35, ,723 Other noncurrent assets and deferred outflows 42,026 4,002 46,028 54,034 4,218 58,252 Total assets and deferred outflows $ 819,197 $ 135,026 $ 954,223 $ 835,706 $ 119,362 $ 955,068 Current liabilities $ 77,21 0 $ 6,140 $ 83,350 $ 71,370 $ 6,707 $ 78,077 Long-term debt 340,258 7, , ,734 10, ,766 Other noncurrent liabilities 39,065 2,003 41,068 52,911 1, Total liabilities 456,533 16, , ,015 18, ,246 Net investment in capital assets 61,535 25,586 87,121 57,307 23,955 81,262 Restricted net position 5,855 5,855 5,854 5,854 Unrestricted net position 301,129 87, , ,384 71, ,706 Total net position 362, , , , , ,822 Total liabilities and net position $ 819,197 $ 135,026 $ 954,223 $ 835,706 $ 119,362 $ 955,068 5

8 Management's Discussion and Analysis (Unaudited) Year Ended September 30, 2013 The statements of revenues, expenses, and changes in net position measures the annual operating success of the organization and can be used to determine whether costs have been recovered through operating revenue sources. Following is a comparative summary of the operations of the Medical Center and the aggregate of its discrete component units. Condensed Statement of Revenues, Expenses and Changes in Net Position (In thousands) Discrete Discrete Medic al Component Medical Component Center Units Total Center Units Total Operating revenue $ 419,026 $ 57,899 $ 476,925 $ 425,575 $ 58,260 $ 483,835 Operating expenses 408,099 48, , ,813 49, ,976 I nco me from operations 10,927 9,673 20,600 15,762 9,097 24,859 Nonoperating revenues (expenses) and gains (losses) {17,954) 8,127 (9,827) (5,1 19) 9,114 3,995 Increase (decrease) in net position $ (7,027! $ 17,800 $ 10,773 $ 10,643 $ 18,21 1 $ 28,854 MANAGEMENT'S DISCUSSION OF RECENT FINANCIAL PERFORMANCE Current assets of the Medical Center increased $12.5 million from fiscal year 2012 primarily as a result of an increase in cash and cash equivalents of $5.3 million, an increase in accounts receivable- patients, net of $2.5 million, and an increase in other current assets of $4.6 million. Current assets of the discrete component units increased $16.2 million from fiscal year 2012 as a result of increases in investments of approximately $10.4 million and the resulting investment income of $7.4 million, offset by a decrease in accounts receivable- patients, net of approximately $1 million. The Medical Center's assets whose use is limited decreased by $21.1 million from fiscal year 2012 primarily due to amounts that were transferred to cash. Capital assets, net of accumulated depreciation increased $3.1 million at the Medical Center, primarily as a result of capital acquisitions of approximately $22.6 million, offset by depreciation expense of $19.5 million. Current liabilities of the Medical Center increased by $5.8 million from September 30, 2012, to September 30, 2013, due to increases in accounts payable and accrued expenses of $3.4 million and other current liabilities of $2.7 million. Current liabilities of the discrete component units decreased $567,000 primarily due to a decrease in accounts payable and accrued expenses of $474,000. The Medical Center's long-term debt decreased $1.4 million from September 30, 2012, to September 30, 2013, as a result of normal principal payments and the reclassification of $1.86 million from long-term debt to current portion due on the 2006A bonds offset by the amortization of other amounts included in long-term debt. As of September 30, 2013, the Medical Center's outstanding bonds (Series 2006A, Series , Series , and Series 2008) were rated 888+ by Fitch Ratings with a stable outlook, and A- long-term rating by Standard & Poor. The Fitch rating is primarily based on the Medical Center's strong liquidity, market share and other factors. The decrease in the discrete component units' long-term debt of $2.1 million is the result of the principal payments on the HMS 2010 bonds. 6

9 Management's Discussion and Analysis (Unaudited) Year Ended September 30, 2013 The decrease in other noncurrent liabilities is primarily due to the long-term value of the interest rate swap, which was $33.4 million at September 30, 2012, and $19.3 million at September 30, The Medical Center's net position at September 30, 2013, was $362.7 million, a decrease of $7.0 million from September 30, 2012, as a result of revenue generated from patient care other operations, offset by expenses and nonoperating losses. The net position of the discrete component units increased $17.8 million as a result of revenue generated from providing patient care, other operating activities, and nonoperating gains. Operating Revenues The decrease in operating revenues of the Medical Center is primarily the result of a decrease in ad valorem tax revenues of $6.7 million. Utilization statistics for the years ended September 30, 2013 and 2012, are as follows: Medical Center and Discrete Component Unit Utilization Statistics Medical Center Activity: Admissions 22,321 22,770 Patient days 119, ,493 Average daily census Total outpatient visits 140, ,046 Observation patient day equivalents 9,547 9,565 Other Halifax Health Activity- Hospice visits 223, ,794 The Medical Center's inpatient admissions for 2013 decreased by 449 admissions (2.0%) compared to 2012, while patient days for 2013 increased by 2,340 (2.0%) compared to The decreases in admissions and increase in patient days led to an increase in the Medical Center's average daily census by seven patients per day from the prior year. Operating Expenses Management of the Medical Center continues to focus on cost-reduction measures. Total operating expenses of the Medical Center decreased $1.7 million from fiscal year 2012 to 2013 due to decreases in salaries and benefits of $6.7 million and decreases other expenses of $0.8 million, offset by increases in supplies of $2.8 million and purchased services of $3.0 million. The Medical Center's depreciation and amortization expense was substantially the same from 2012 to

10 Management's Discussion and Analysis (Unaudited) Year Ended September 30, 2013 The Medical Center also incurs expenses related to ad valorem taxes levied. These expenses include payments to Volusia County and the cities of Daytona Beach, Ormond Beach, Holly Hill, and Port Orange (tax collector and appraiser commissions, Medicaid matching funds, and redevelopment taxes) and the costs of nonhospital community health services (physician services, community clinics, prescription drugs, medical supplies, etc.). Ad valorem tax-related expenses decreased from $9.1 million in fiscal year 2012 to $6.7 million in fiscal year Nonoperating Revenues, Expenses, Gains and Losses Interest expense of the Medical Center was relatively unchanged from 2012 to Investment income for the Medical Center decreased $13.0 million from fiscal year 2012 to fiscal year 2013 as a result of decreases in market value of certain investments. Investment income for the Medical Center includes approximately $9.0 million in unrealized losses on investments as of September 30, KEY FINANCIAL INDICATORS The following represents a summary of key financial indicators of Halifax Health: Key Financial Indicators Total margin Days cash on hand Unrestricted cash to long-term debt Long-term debt to capitalization Total net patient service revenue, before provision for bad debts (in millions) % % 42.3% $ % % 43.0% $ The total margin decreased to 1.9% in fiscal year 2013 due to the decreases in operating revenues and investment income from fiscal year The number of days cash on hand, which includes investments and board designated assets whose use is limited, increased from 281 days at September 30, 2012, to 286 days at September 30, 2013, due to the increase in cash at September 30, Unrestricted cash (including investments and board designated assets whose use is limited) to long-term debt improved as a result of the increase in cash and decrease in long-term debt. Debt to capitalization improved as long-term debt decreased. COMMUNITY BENEFIT Halifax Health provides a continuum of health care services to the community and is involved in num erous outreach programs that help meet the public health needs of the community. Halifax Health provided an estimated $54.6 million in net community benefits during fiscal year 2013, which is comprised of amounts paid for community health and wellness services and the cost of uncompensated care. 8

11 Management's Discussion and Analysis (Unaudited) Year Ended September 30, 2013 RISK FACTORS The health care industry is highly dependent upon a number of factors that could have a significant effect on the future operations and financial condition of the Medical Center and its component units. These factors include, but are not limited to, competition, state and federal regulatory authorities, Medicare and Medicaid laws and regulations, healthcare reform initiatives, environmental laws, advances in technology, changes in demand for health care services, demographic changes, and managed care contract terms and conditions. As of the date of this report, the following known facts, decisions, or conditions may have a significant effect on net position or the results of operations: Salaries in the health care industry continue to be very competitive due to increased costs of attracting and retaining quality physicians, registered nurses, and other health care professionals. The laws and regulations governing the Medicare and Medicaid program are complex and subject to change. As such, changes to these programs could have a negative effect on the financial performance of the Medical Center. Changes to the Medicare and Medicaid programs are listed below. Audits of hospital compliance with Medicare and Medicaid program laws and regulations have increased in recent years and present additional exposure for repayments and fines and penalties. In March 2010, President Barrack Obama signed the Health Care and Education Reconciliation Act of 2010 (HCERA). The full impact on the Medical Center has not yet been determined, however, HCERA is intended to: o o o o o Cut Federal health care spending by reducing Medicare and Medicaid disproportionate share reimbursements, Improve the delivery system of health care by reducing and bundling reimbursements, as well as pilot programs for accountable care organizations and medical homes, Introduce an independent payment advisory board in 2015, which will have the authority to further reduce Medicare reimbursement rates, Revise the eligibility criteria for Medicaid, and Mandate insurance coverage for individuals and businesses and provide subsidies for those meeting eligibility criteria. In December 2009, the Office of Inspector General (OIG), U.S. Department of Health and Human Services ("the Government") informed the Medical Center that it was conducting an investigation of the Medical Center concerning certain claims that were submitted to Medicare. The Medical Center subsequently learned that the Government's request arose from a qui tam action, for which the Government filed its formal complaint on November 4, 2011, intervening in some of the qui tam whistleblower's allegations but not others. The Government's complaint alleges that the Medical Center violated the Stark Law in its compensation of certain neurosurgeons and medical oncologists. The qui tam whistleblower is independently pursuing the non-intervened claims. 9

12 Management's Discussion and Analysis (Unaudited) Year Ended September 30, 2013 The Medical Center routinely enters into compensation agreements with physicians to ensure that the medical needs of the community are met. Such compensation agreements are evaluated on a variety of factors, including fair market value of compensation, and all agreements are subject to an internal legal review. Management of the Medical Center believes these physicians were compensated at a fair market rate and that the agreements were commercially reasonable. The Stark Law was enacted to prevent compensating physicians based on referrals for certain designated health services unless certain conditions apply. The Medical Center hired these neurosurgeons and medical oncologists as employees, which are specifically exempt from the Stark Law enforcement so long as their compensation is based on fair market value, commercially reasonable and meets the requirements of applicable Stark Law exceptions. The Medical Center also engaged a national law firm that specializes in Stark Law issues to review these contracts. That law firm verified that the medical oncologists' compensation agreements were in compliance with the Stark Law and provided the Medical Center with a written report to that effect. Recently, the Court partially granted the Government's motion for partial summary judgment in ruling that the medical oncology agreements violated the Stark Law. Even though the Court ruled that the medical oncology agreements violated the Stark Law, the Court declined to assess any damages and denied the Government's motion for summary judgment on its False Claims Act claim. The Medical Center believes its defenses are meritorious, and is weighing its options to appeal the Court's ruling. The Court also recently denied the qui tam whistleblower's motion for a summary judgment. The Court's ruling had no affect on the Government's claims regarding the neurosurgeon agreements. Management believes that the neurosurgeons named in the claim received compensation that was based on fair market value, commercially reasonable, and complied with the Stark Law. The probability of a favorable or unfavorable outcome on either the Government's claims regarding the neurosurgeon agreements or the Relator's non-intervened claims is unknown. While the Medical Center believes its defenses are meritorious, the ultimate resolution cou ld adversely affect the Medical Center's financial condition, results from operations, or cash flows. The Government's complaint seeks damages up to $1.14 billion. The whistleblower's most recent pleadings seeks damages in the amount of approximately $81 million for which the Government has not intervened. Management of the Medical Center disagrees with the calculation of damages, and believes that, should any damages be assessed, they would be less than those sought by the Government and the whistleblower. A trial date on the remaining claims is currently scheduled for March Any attempts to negotiate a settlement prior to trial would be strictly for the purpose of minimizing the legal expenses associated with defending this claim, and not an admission of wrongdoing by the Medical Center. Expenses paid to outside firms to assist in the defense of this claim since its inception are in excess of $16 million, $8 million of which was paid during the fiscal year ended September 30,

13 Statement of Net Position September 30, (In thousands) Discrete Total Medical Component (Memorandum Assets and Deferred Outflows Center Units Onl;t~ Current Assets Cash and cash equivalents $ 35,765 $ 1,473 $ 37,238 Investments 161,209 81, ,784 Current assets whose use is limited- Trustee-held self-insurance funds Accounts receivable, patients, net of estimated uncollectibles of $104,170 and $355, respectively 43,514 3,672 47,186 Inventories 11, ,459 Other current assets 16, ,245 Total current assets 268,799 86, ,718 Restricted Funds Under Indenture Agreements for Debt Service 20, ,404 Noncurrent Assets Whose Use is Limited: Board-designated funded depreciation 147, ,258 Restricted by donor 5,671 5,671 Board-designated, other 2,650 2,650 Capital Assets, net 340,918 35, ,494 Goodwill 6,372 6,372 Other Assets 7,110 3,889 10,999 Deferred Outflows: Interest rate swap 19,262 19,262 Bond issuance costs 9, ,395 Total deferred outflows 28, ,657 Total assets and deferred outflows $ 819,197 $ 135,026 $ 954,223 (Continued) 11

14 Statement of Net Position September 30, 2013 (In thousands) Discrete Total Medical Component (Memorandum Liabilities and Net Position Center Units Only) Current Liabilities Accounts payable and accrued liabilities $ 47,228 $ 993 $ 48,221 Accrued payroll and personal leave time 14, ,083 Current portion of accrued self-insurance liability 5,001 5,001 Current portion of long-term debt 1,855 2,151 4,006 Other current liabilities 8,858 2,181 11,039 Total current liabilities 77,210 6,140 83,350 Long-Term Debt, less current portion 340,258 7, ,210 Accrued Self-Insurance Liability, less current portion 8,268 8,268 Other Liabilities 11,535 2,003 13,538 Long-Term Value of Interest Rate Swap 19,262 19,262 Total liabilities 456,533 16, ,628 Net Position: Net investment in capital assets 61,535 25,586 87,121 Restricted for debt service Restricted by donors, expendable 5,427 5,427 Restricted by donors, nonexpendable Unrestricted 301,129 87, ,619 Total net position 362, , ,595 Total liabilities and net position $ 819,197 $ 135,026 $ 954,223 See. 12

15 Statement of Revenues, Expenses and Changes in Net Position Year Ended September 30, 2013 (In thousands) Discrete Total Medical Component (Memorandum Center Units Onll:) Operating revenues: Net patient service revenue, before provision for bad debt $ 479,925 $ 47,408 $ 527,333 Provision for bad debt (93,727) (808) (94,535) Net patient service revenue 386,198 46, ,798 Ad valorem tax revenue 15,273 15,273 Other revenue 17,555 11,299 28,854 Total operating revenues 419,026 57, ,925 Operating expenses: Salaries and benefits 215,744 24, ,008 Supplies 82,235 3,240 85,475 Purchased services 50,306 14,184 64,490 Depreciation and amortization 19,863 1,394 21,257 Ad valorem tax-related expenses 6,685 6,685 Leases and rentals 8,015 1,947 9,962 Other 25,251 3, Total operating expenses 408,099 48, ,325 Income from operations 10,927 9,673 20,600 Nonoperating revenues (expenses) and gains (losses): Interest expense (18, 561) (443) (19,004) Investment income - net 472 7,356 7,828 Donation revenue 80 1,226 1,306 Nonoperating gains (losses) - net 55 {1 2) 43 Total nonoperating revenues (expenses) and gains (losses) (17,954) 8,127 (9,827) Increase (decrease) in net position (7,027) 17,800 10,773 Net position: Beginning of year 369, , ,822 End of year $ 362,664 $ 118,931 $ 48 1,595 See. 13

16 Statement of Cash Flows Year Ended September 30, 2013 Cash Flows From Operating Activities Receipts from th ird-party payors and patients Payments to employees Payments to suppliers Ad valorem taxes Other receipts Other payments Net cash provided by operating activities $ Discrete Total Medical Component (Memorandum Center Units Only) 393,148 $ 48,265 $ 441,413 (220,437) (24,179) (244,616) (140,706) (18,609) (159,315) 15,182 15,182 20,387 8,691 29,078 (40,176) (4, 191) (44,367) 27,398 9,977 37,375 Cash Flows From Noncapital Financing Activities Proceeds from donations received Transfers and deposits from (to) component units Other nonoperating (payments) receipts Net cash provided by noncapital financing activities 79 1,227 1,306 (55) ,282 1,360 Cash Flows From Capital and Related Financing Activities Acquisition of capital assets Principal paid on long-term debt Payment of interest on long-term debt Net cash used in capital and related financing activities (22,683) (1,032) (23,715) (1,830) (2,082) (3,912) (18,229) (375) (18,604) (42,742) (3,489) (46,231) Cash Flows From Investing Activities Realized investment income Purchase of investments and assets whose use is limited Proceeds from sales and maturities of investments and assets whose use is limited Net cash provided by (used in) investing activities 9,497 1,851 11,348 (113,218) (10,456) (123,674) 124,335 1, ,770 20,614 (7, 170) 13,444 Net increase in cash and cash equivalents 5, ,948 Cash and cash equivalents Beginning of year End of year $ 30, ,290 35,765 $ 1,473 $ 37,238 (Continued) 14

17 Statement of Cash Flows Year Ended September 30, 2013 Reconciliation of Income From Operations to Net Cash Provided By Operating Activities: Income from operations Adjustments to reconcile income from operations to net cash provided by operating activities: Depreciation and amortization expense Unrealized gains on investments considered operating activity Provision for bad debts Changes in assets and liabilities: Accounts receivable - patients Inventories and other current assets Other assets Accounts payable and accrued liabilities Other liabilities Net cash provided by operating activities Medical Center $ 10,927 19,863 93,727 (96,274) (11,702) (2,438) 9,996 3,299 $ 27,398 Discrete Total Component (Memorandum Units Only) $ 9,673 $ 20,600 1,394 21,257 (2,056) (2,056) ,535 (1) (96,275) 62 (11,640) (56) (2,494) (474) 9, ,926 $ 9,977 $ 37,375 Supplemental Disclosure of Noncash Investing, Capital, and Financing Activities Property and equipment included in accounts payable $ 1,996 $ 102 $ 2,098 See. 15

18 Statement of Fiduciary Net Position September 30, 2013 (In thousands) Assets: Investments, at fair value: Money market and mutual funds Pooled, common and collective funds Net position restricted for pension benefits $ $ 185,452 21, ,198 See. 16

19 Statement of Changes in Fiduciary Net Position Year Ended September 30,2013 (In thousands) Additions: Investment results: Appreciation in fair value of investments Interest and dividends Investment expenses Net investment results Employer's contributions Total additions Deductions: Administrative expenses Benefits paid directly to participants Total deductions Decrease in net position restricted for pension benefits Net Position Restricted for Pension Benefits Beginning of year End of year $ 21,388 4,722 p 18} 25,992 12,688 38, ,496 50,570 (11,890) 219,088 $ 207,198 See. 17

20 Note 1. Description of the Organization Reporting Entity: Halifax Hospital Medical Center (the "Medical Center") was created by a special act of the Legislature of the State of Florida, Chapter , Laws of Florida, as a special taxing district, a public body corporate and politic of the State of Florida and successor to Halifax Hospital District created pursuant to Chapter , Laws of Florida, Special Acts of The Medical Center's Board of Commissioners (the "Board") is empowered to levy ad valorem taxes for operating expenses, capital outlays, and other purposes. The Medical Center, located in Daytona Beach, Florida, is a full-service, accredited, acute care hospital licensed to operate 764 beds. The Medical Center owns and operates three inpatient hospital facilities under one license and several ambulatory facilities. The main campus of the Medical Center is the inpatient referral center, providing Level l I neonatal intensive care, and a Level II state-certified trauma center, and offering open-heart surgery, neurosurgery, and other specialty inpatient and outpatient services. The Port Orange campus, located ten miles south of the main campus, is a community hospital providing a broad range of services to the residents of Port Orange and Southeast Volusia County. The Halifax Behavioral Services campus, located two miles north of the main campus, provides child, adolescent, and adult inpatient and outpatient psychiatric services to the residents of Volusia and Flagler Counties. As required by accounting principles generally accepted in the United States of America ("GAAP"), these financial statements represent the primary government, the Medical Center, and its component units. The component units discussed below are included because of the significance of their operational or financial relationships with the Medical Center. The Medical Center, together with its component units, is referred to as "Halifax Health." Component Units: East Volusia Health Services, Inc. ("EVHS"); HH Holdings, Inc. ("Holdings"); Halifax Healthy Families Corporation d/b/a Healthy Communities ("Healthy Communities"); Halifax Hospice, Inc. Hospice of Volusia/Fiagler ("Hospice"); Halifax Management System, Inc. ("HMS"); Halifax Medical Center Foundation, Inc. ("Foundation"); Halifax Staffing, Inc. ("Staffing"); Patient Business & Financial Services, Inc. ("PBFS"); and Volusia Health Ventures, Inc. d/b/a Volusia Health Network ("VHN") are legally separate organizations for which the Medical Center is financially accountable and the nature and significance of their relationship to the Medical Center are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. With the exception of the Foundation, the Medical Center Board appoints the Board of Directors for the other component units, and each has a specific financial benefit or burden to the Medical Center. While the Foundation appoints its own Board of Directors, it also has a specific financial benefit to the Medical Center, and is fiscally dependent on the Medical Center. Accordingly, these organizations represent component units of the Medical Center. Blended Component Units: EVHS, Holdings, Healthy Communities, Staffing, and PBFS were established primarily to provide administrative and other services for and on behalf of the Medical Center. These entities are blended within the financial results of the Medical Center because they have substantially the same governing body as the Medical Center, and management of the Medical Center has operational responsibility for these component units. The Medical Center is the sole member of each blended component unit. EVHS is a not-for-profit corporation organized under the laws of Florida. EVHS was organized for the purpose of entering into joint-venture agreements to enhance the access and quality of patient care provided to the community. Holdings is a not-for-profit corporation organized under the laws of Florida that was established to manage the remaining assets that resulted from the sale of Florida Health Care Plan in

21 Note 1. Description of the Organization (Continued) Healthy Communities is a not-for-profit corporation organized under the laws of Florida that coordinates the delivery of education, health resources, and direct assistance to the community. The services provided by Healthy Communities include administering Healthy Kids (child health insurance program), facilitating the provision of preventive care, and providing education and other activities relating to the general welfare of all children in Volusia and Flagler counties. Staffing is a not-for-profit corporation organized under the laws of Florida, formed for the purpose of providing individuals to staff and manage the Medical Center, its component units, and any other related entities and facilities. The Medical Center is obligated to reimburse Staffing for all costs incurred in meeting its obligations under an agreement between the parties. PBFS is a not-for-profit corporation that operates the patient accounting services for the Medical Center and employs certain staff for this function. Discrete Component Units: Foundation, Hospice, HMS, and VHN are reported as discrete component units. Foundation and VHN have different Boards of Directors from the Medical Center Board and neither organization is exclusive to the Medical Center. Hospice does not have a specific financial benefit or burden to the Medical Center and is not exclusive to the Medical Center. The resources of HMS are considered significant to the Medical Center. Separately audited financial statements for Hospice and HMS may be obtained directly from the Medical Center upon request. The Foundation was organized in 1988 as a not-for-profit corporation under the laws of Florida. The Foundation is the fund-raising organization for the Medical Center. Hospice was organized in 1984 as a not-for-profit corporation under the laws of Florida. Hospice provides palliative medical care and treatment to patients who have less than six months to live via three inpatient care centers and in-home hospice services. The Port Orange care center is a 16-bed inpatient care center located in the City of Port Orange. The West Volusia Care Center is an 18-bed center in Orange City. The Southeast Volusia care center is a 12-bed facility located in Edgewater. HMS was organized in 1984 as a not-for-profit corporation under the laws of Florida. HMS owns and leases to the Medical Center two ambulatory facilities and one hospital facility. Facilities located in Ormond Beach and on the Medical Center's main campus in Daytona Beach provide outpatient hospital services and medical offices. The third facility, located in Port Orange, is an 80-bed inpatient hospital. VHN was organized in 1984 as a not-for-profit corporation under Florida law. VHN operates a preferred provider network of physicians and hospitals in the service area and offers the network and certain related services to employers that are self-insured for health coverage of their employees. Presented on the following pages are condensed combining schedules for the component units. 19

22 Note 1. Description of the Organization (Continued) Condensed Combining Statement of Net Position September 30, 2013 (In thousands) Blended Comeonent Units Discrete Comeonent Units Total Primary Total Medical Total Discrete (Memorandum Assets Government Holdings Staffing PBFS EVHS Center Hospice VHN Foundation HMS Component Units Only) Current Assets s 111,105 $ 155,937 s $ $ 1,757 $ 268,799 $ 63,278 $ 47 $ s s 86,919 $ Restricted Funds Under Indenture Agreements for Debt Service , ,404 Noncurrent Assets Whose Use is Limited ,650 5, Capital Assets, net 319,400 13,648 7, ,918 16,070 19,506 35, ,494 Other Assets and Deferred Outflows 37, ,028 Total assets $ 635,240 s 169,685 $ $ $ 14,272 $ 819,197 $ s 47 $ 29,587 $ 19,827 $ 135,026 ~223 Liabilities and Net Position Current Liabilities $ 77,202 $ 8 $ $ $ $ 77,210 $ 1,800 $ 602 $ 1 $ $ 6,140 $ 83,350 Long-Term Debt, less current portion 340, ,258 7, ,210 Other Liabilities 28, ,065 2,003 2,003 41,068 Total liabilities , , ~628 Net Position: Net investment in capital assets 40,017 13,648 7,870 61,535 16,070 9,516 25, Restricted for debt service Restricted by donors. expendable 5,427 5,427 5,427 Restricted by donors, nonexpendable Unrestricted ,822 (3.840) 301,129 67,695 (555) 21,912 (1,562! 87, ,619 Total net position 189, ,470 4, (555) , ,931 ~595 Total llabjiitles and net position s 635,240 $ 169,685 $ $ $ s 819,197 $ $ 47 s $ 19,827 $ 135,026 $ 954,223 20

23 Note 1. Description of the Organization (Continued) Condensed Combining Statement of Revenues, Expenses and Changes i n Net Position Year Ended September 30, 2013 (In thousands) Primary Government Holdinqs Blended Component Units Staffinq PBFS EVHS Total Medical Center Discrete com~nent Units Total Total Discrele (Memorandum Hos~ice VHN Foundation HMS ComEonent Units Onl~l Operating Revenues $ 416,282 $ $ 1,342 $ $ 801 s $ s 57,899 s 476,925 Operating Expenses. before depreciation and amortization Depreciation and amortization Total operating expenses 168,144 19, , , , , , ,236 19, , ,156 46, , , , ,226 ~325 Income (loss) from operations 229, (208,034) (11,565) 1,211 10,927 3,440 (163) ,995 9,673 20,600,.....,....., Nonoperating revenues {expenses) and gains (losses \'~'.Y~I '""'""' 1;:,1... 1'\0I'V'I A "uo,u~ 11,565 (17,954) 8,568 (441) 8,127 (9,827) Increase (decrease) In net position $ {~.40IJ ~ Ll:l.) ~ $ $ l (7,027) 1 12,008 $ (163) s 4,401 s 1,554 s 17,800 s 10,773 21

24 Note 1. Description of the Organization (Continued) Condensed Combining Statement of Cash Flows September 30, 2013 (In thousands) Blended Component unns Primary Net provided (used) by : Government Holdings Staffing PBFS EVHS Total Medical Center Discrete Component Unns Total Total Discrete (Memorandum Hospice VHN Foundation HMS Component Unns Only) Operating activnies $ Noncap~al financing activ~ies Cap~al and related financing activities Investing activ~ies 248,573 (229,061) (33,986) 20,614 $ 1,396 (510) (886) $(208,034) $ (11,565) $ (2,972) $ 27, , ,050 (7,870) 78 (42,742) 20,614 $ 4,497 $ (185) $ 2,845 s 2,820 s 9,977 $ 37,375 1, (363) 1,282 1,360 (1,032) (2,457) (3,489) (46,231) (4,346) (2.824) (7,170) 13,444 Net Increase (decrease) In cash and cash equivalents 6,140 (792) 5, ,948 Cash and cash equivalents Beginning of year End of year $ ,671 $ ,417 $ $ $ 94 $ 35, ,290 $ 946 $ $ 527 $ $ 1,473 $ 37,238 22

25 Note 1. Description of the Organization (Continued) Fiduciary Fund Financial Statements: The Pension Trust Fund (the "Pension Fund"), the fiduciary fund, is used to account for the net position restricted for the pension benefits of certain employees of Staffing and Hospice. Note 2. Significant Accounting Policies A summary of the Company's significant accounting policies follows: Accounting standards: These financial statements have been prepared in accordance with the Governmental Accounting Standards Board ("GASB") codification ("GASB Cod."). The financial statements of the component units are also prepared in accordance with the GASB codification, as they are established for the direct benefit of the Medical Center. The financial statements of the Medical Center and its component units have been prepared on the accrual basis of accounting. "Total (Memorandum Only)" columns: Total columns in the financial statements are noted "Memorandum Only" to indicate that they are presented only to facilitate financial analysis. Data in these columns do not present financial position, results of operations, or cash flows in conformity with Accounting Principles Generally Accepted in the United States of America ("GMP"). Certain intercompany eliminations have not been made in the summarization of this data. Cash and cash equivalents: All unrestricted highly liquid investments with maturities of three months or less when purchased are considered cash equivalents, excluding cash and cash equivalents included in assets whose use is limited. The Medical Center cash deposits are fully collateralized and component unit cash accounts are insured up to FDIC limits. Investments: Investments are reported at fair value or amortized cost, if not materially different from fair value. Investments are marketable securities representing the investment of cash available for current operations, and as such are reported as current assets. Interest and dividends, when earned, and realized and unrealized investment gains and losses are recorded as nonoperating revenue in the Medical Center's and certain affiliates' statements of revenues, expenses, and changes in net position. Interest and dividends, when earned, and realized and unrealized investment gains and losses of the Foundation are recorded as operating revenue in the accompanying statements of revenues, expenses, and changes in net position. Net patient accounts receivable: Net patient accounts receivable are reported at estimated net realizable amounts due from patients, third-party payers, and others for services rendered. The provision for bad debts is based on management's assessment of historical and expected net collections, considering business and economic conditions, trends in health care coverage, and other collection indicators. Throughout the year, management assesses the adequacy of the allowance for uncollectible accounts based upon these trends. The results of this review are then used to make any modifications to the provision for bad debts and to establish an appropriate estimated allowance for uncollectible accounts. Specific patient accounts identified as uncollectible are written off to the allowance for uncollectible accounts. Assets whose use is limited: Assets whose use is limited includes assets held for self-insurance funds, trustee-held funds for debt service reserves, Board-designated funded depreciation, and Boarddesignated assets set aside for other purposes. The Board may change these Board designations at their discretion. Inventories: Inventories consist of supplies, which are stated at the lower of cost or market (on a first-in, first-out basis). 23

26 Note 2. Significant Accounting Policies (Continued) Capital assets: Purchases of real property and equipment greater than $1,000 that have a useful life of longer than one year are capitalized at cost. The cost of replacements is capitalized in the same manner. Interest expense incurred during construction, net of investment gains on proceeds from issued debt, is capitalized. Interest cost incurred during construction for which no debt has been issued is evaluated based on the size and duration of the project for capitalization. The cost of minor equipment less than $1,000 and repairs are recorded in operating expenses. Capital assets are reviewed and considered for impairment whenever indicators of impairment are present, such as the decline in service utility of a capital asset that is large in magnitude and the event or change in circumstance is outside the normal life cycle of the capital asset. Intangible assets: Certain intangible assets are capitalized in accordance with GASB Cod. Sec. 1400, Reporting Capital Assets. Generally, those intangible assets would meet the same criteria for capitalization as other capital assets; cost greater than $1,000 and a useful life of longer than one year. Goodwill: Goodwill was recorded at the Medical Center in connection with the purchase of an ambulatory surgery center during fiscal year 2011, and represents the purchase price in excess of the fair value of net assets acquired. Depreciation and amortization: Capital assets, excluding land and construction in progress, is depreciated on a straight-line basis over the estimated useful lives of the related assets. Estimated useful lives range from 5 to 20 years for building improvements, 1 0 to 40 years for buildings, 1 0 to 20 years for fixed equipment, and 3 to 20 years for major movable equipment. Capitalized intangible assets are amortized over their useful life, with the exception of goodwill, which is not amortized but is evaluated at least annually for impairment. Derivative instruments: The Medical Center has entered into an interest rate-swap agreement {the "Swap"), and applies hedge accounting in accordance with GASB Cod. Sec. 040, Derivative Instruments. For effective hedging instruments, the change in fair value is recorded as a deferred outflow in noncurrent assets on the accompanying statements of net position, and the fair value of the Swap is reported in noncurrent liabilities. See Note 9 for more information on the Swap. Deferred outflows: In addition to the Swap described above, bond issuance costs are included in deferred outflows and amortized over the period the bonds are outstanding using the straight-line method, as it approximates the effective interest rate method. Amortization expense related to bond issuance costs is included in depreciation and amortization expense in the accompanying statements of revenues, expenses, and changes in net position. Personal leave time: Personal leave time, which includes holiday, sick, and vacation time, that is accrued but not used at September 30, 2013, is included in accrued payroll and personal leave time in the accompanying statements of net position. 24

27 Note 2. Significant Accounting Policies (Continued) Pension plan: The Halifax Pension Plan (the "Plan") is a cost-sharing, multiple-employer, noncontributory defined benefit pension plan that covers certain employees of the two participating employers. The Plan is accounted for in accordance with GASB Cod. Sec. Pe5, Pension Plans- Defined Benefit. Contributions are made based on the minimum recommended contribution as determined by actuarial valuation. The Plan is considered a governmental plan exempt from Employee Retirement Income Security Act requirements based upon rulings received from the Internal Revenue Service. See Note 10 for more information on the Plan. Self-insurance: Halifax Health is self-insured for various risks of loss, including professional and general liability losses, workers' compensation claims, and employees' health claims. Estimated liabilities include a reserve for known claims and for claims that have been incurred but not reported. The noncurrent portion of estimated professional and general liability losses and workers' compensation claims have been discounted using a 4% interest rate for Estimated losses for employees' health claims are not discounted as all amounts are considered current liabilities. See Note 7 for more information on selfinsurance liabilities. Income taxes: The Medical Center is tax exempt under Section 115 of the Internal Revenue Code (" IRC"). With the exception of VHN, all of the component units are not-for-profit corporations described in Section 501(c)(3) of the IRC and are exempt from federal and state income taxes on related income pursuant to Section 501 (a) of the IRC and Chapter of the Florida Statutes, respectively. VHN is a taxable Florida not-for-profit corporation. There was no material amount of tax expense or benefit for the year ended September 30, Net position: In accordance with GASB Cod. Sec. 2200, Comprehensive Annual Financial Report, net position is reported in three components: net investment in capital assets, restricted, and unrestricted. Net investment in capital assets consists of capital assets net of accumulated depreciation and reduced by the outstanding balances of any debt issued that is attributable to the acquisition, construction, or improvement of those capital assets. If there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds are not included in the calculation of net investment in capital assets. The restricted component of net position consists of restricted assets; assets that have constraints placed on them externally by creditors, grantors, contributors, or laws or regulations of other governments, or laws through constitutional provisions or enabling legislation, reduced by liabilities or deferred inflows related to those restricted assets. The unrestricted component of net position consists of the net amount of assets, deferred outflows of resources and liabilities, and deferred inflows of resources that do not meet the definitions of the other two components of net position. Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 25

28 Note 2. Significant Accounting Policies (Continued) Revenue and expenses: For purposes of presentation, transactions deemed by management to be ongoing, major, or central to the provision of health care services are reported as operating revenue and expenses. Peripheral or incidental transactions, such as interest expense, nonoperating gains and losses, donations, and investment income are reported as nonoperating revenues, expenses, gains, and losses. Ad valorem taxes levied and received by the Medical Center are designated by law to fund the Medical Center's operating expenses, which may include maintenance, construction, improvements, and repairs to the Medical Center or fund other expenses in carrying out the business of the Medical Center. The Medical Center considers ad valorem tax receipts to be ongoing and central to the provision of health care services and, accordingly, classifies these funds as operating revenue. Ad valorem taxes received by the Medical Center are based on the assessed valuation of certain taxable real and personal property at the Board-approved millage rate for the year. Gross receipts of $15.3 million are included in operating revenues in the accompanying statements of revenues, expenses, and changes in net position. Certain expenses directly attributable to the Medical Center's status as a taxing authority are classified as ad valorem tax-related expenses. These expenses, when added to the charity care and other uncompensated care provided to qualifying patients, exceed ad valorem taxes received and are considered by the Board when determining tax assessments. Substantially all expenses, including financing costs and those expenses directly attributable to the Medical Center's status as a taxing authority, are considered by management to be ongoing and central to the provision of health care services and, therefore, are reported as operating expenses. The excess (deficit) of revenue over expenses is reported as income (loss) from operations in the accompanying statements of revenues, expenses, and changes in net position and excludes nonoperating revenues, expenses, gains, and losses. When an expense is incurred for which both unrestricted and restricted resources are available, restricted resources are applied first. Net patient service revenue: The Medical Center and Hospice serve certain patients whose medical costs are not paid at established rates. These include patients sponsored under government programs, such as Medicare and Medicaid, patients sponsored under private contractual agreements, and uninsured patients who have limited ability to pay. Net patient service revenue is reported at estimated net realizable amounts due from patients, third-party payors, and others for services rendered, and includes estimated retroactive revenue adjustments due to future audits, reviews, and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. Approximately $8.3 million in amounts due to Medicare and Medicaid relating to estimated future retroactive adjustments is recorded in accounts payable and accrued liabilities. 26

29 Note 2. Significant Accounting Policies (Continued) Revenue from the Medicare and Medicaid programs accounted for approximately 38% of net patient service revenue for the year ended September 30, Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. Adjustments to revenue are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as changes in estimated provisions and final settlements are determined. Adjustments to revenue related to prior periods increased net patient service revenue by approximately $6.8 million for the year ended September 30, The Medical Center and Hospice classify a patient as charity based on established policies. These policies define charity services as those services for which no additional payment is anticipated. When assessing a patient's ability to pay, the Medical Center utilizes percentages of the federal poverty income levels, as well as the relationship between charges and the patient's income. Hospice classifies charity patients as those whose income is at or below the federal poverty guidelines. Core services may be covered in full, or discounted based on income and a sliding scale. Charity care, based on estimated costs, totaled approximately $14,789,000 for the year ended September 30, Cost of charity care is calculated by applying the cost-to-charge ratio to the total amount of charity care deductions from gross revenue. The cost-to-charge ratio is calculated by taking the hospital total expenses and gross charges and applying adjustments to offset non-patient care activity revenue against expense as well as eliminate bad debt expense. Net patient service revenue is reported net of charity adjustments, contractual adjustments, and provision for bad debts for the year ended September 30, 2013, as follows (in thousands): Discrete Total Medical Component (Memorandum Center Units Onl:t} Gross patient charges $ 1,317,714 $ 48,701 $ 1,366,415 Charity adjustments (46,336) (728) (47,064) Contractual adjustments {791,453} {565} {792,018} Net patient service revenue before provision for bad debts 479,925 47, ,333 Provision for bad debts {93,727} {808} {94,535} Net patient service revenue $ 386,198 $ 46,600 $ 432,798 New accounting standards: On October 1, 2012, Halifax Health adopted GASB Statement No The Financial Reporting Entity: Omnibus and Amendment of GASB Statements No. 14 and No. 34. This statement had no material impact on the financial statements of Halifax Health. In March 2012, the GASB issued Statement No Items Previously Reported as Assets and Liabilities, effective for reporting periods beginning after December 15, This Statement changes the classification of certain items that were previously reported as assets and liabilities to that of deferred outflows or inflows of resources, and recognized certain amounts previously reported as assets and liabilities as revenues or expenses. Management anticipates this statement will result in Halifax Health recording a reduction of deferred outflows of approximately $9.4 million upon adoption. 27

30 Note 2. Significant Accounting Policies (Continued) In March 2012, the GASB issued Statement No Technical Corrections an amendment of GASB Statements No. 10 and No. 62, effective for reporting periods beginning after December 15, Management is currently evaluating the effect of this statement on the financial statements of Halifax Health. In June 2012, the GASB issued Statement No. 68- Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27, effective for reporting periods beginning after June 15, Management anticipates this statement will result in the Medical Center recording a net pension liability of approximately $130 million upon adoption. In January, 2013, the GASB issued Statement No. 69- Government Combinations and Disposals of Government Operations, effective for reporting periods beginning after December 15, Management is currently evaluating the effect of this statement on the financial statements of Halifax Health. In April 2013, the GASB issued Statement No. 70- Accounting and Financial Reporting for Nonexchange Financial Guarantees, effective for reporting periods beginning after June 15, Management is currently evaluating the effect of this statement on the financial statements of Halifax Health. 28

31 Note 3. Investments, Assets Whose Use is Limited, and Restricted Assets The composition of investments, assets whose use is limited, and restricted assets at September 30, 2013, is set forth below (in thousands): Medical Center Insurance Agreements for Funded Restricted Designated Investments Funds Debt Service DeEreciation by Donor Other Total Money market funds $ 29,417 $ 177 $ 194 $ 3 $ - $ - $ 29,791 Mutual funds: Vanguard Short-Term Federal Admiral Fund , ,189 PIMCO Moderate Duration lnst. Fund 71, ,778 Vanguard Short-Term Investment Grade Admiral Fund 54, ,655 U.S. Treasury obligations ,021 16,041 U.S. Government-sponsored enterprises: Federal National Mortgage Association ,930-15,219 Federal Home Loan Bank , ,923 Federal Home Loan Mortgage Corporation , ,876 Repurchase agreements , ,002 Other 4, ,995 Total Medical Center $ 161,209 $ 806 $ 20, 196 $ 147,258 $ - $ - $ 329,469 Discrete Component Units Money market funds $ - $ - $ 208 $ - $ $ - $ 208 Mutual funds 63, ,427 2,650 72,003 Common collective trust 17, Other Total Discrete Component Units $ 81,575 $ $ 208 $ - $ 5,671 $ 2,650 $ 90,104 29

32 Note 3. Investments, Assets Whose Use is Limited, and Restricted Assets (Continued) Assets whose use is limited for obligations classified as current liabilities are reported as current assets. The Medical Center invests in money market and mutual funds that qualify as fixed-income securities in accordance with its investment policy described in Note 4. At September 30, 2013, the Medical Center was invested in one money market fund, the Wells Fargo Advantage Government Money Market Fund, and the following mutual funds: PIMCO Moderate Duration Institutional Fund (PMDRX) is an intermediate-term bond fund which invests primarily in investment grade debt securities. Vanguard Short-Term Federal Admiral Fund (VSGDX) invests at least 80% of its portfolio in short-term debt securities issued by the U.S. government, its agencies and U.S. governmentsponsored entities. Vanguard Short-Term Investment-Grade Admiral Fund (VFSUX) invests at least 80% of its portfolio in short- and intermediate-term investment grade securities. At September 30, 2013, the Medical Center held debt securities in U.S. Treasury Obligations and U.S. Government-sponsored enterprises including Federal National Mortgage Association, Federal Home Loan Bank, and Federal Home Loan Mortgage Corporation. At September 30, 2013, the Medical Center also held certain repurchase agreements with guaranteed rates of return between 3% and 4.9%, expiring in Those agreements are classified as trustee-held funds under indenture agreements for debt service. The discrete component units invest in mutual funds that have underlying investments in equities and debt securities. The discrete component units also invest in a common collective trust that has a two-day hold on redemptions. At September 30, 2013, management had no plans to liquidate any portion of its holdings in the common collective trust. Net investment income on assets whose use is limited, restricted assets, and investments for the year ended September 30, 2013, was $472 thousand for the Medical Center, and $7.4 million for the discrete component units. Investment income includes unrealized losses of approximately $9.0 million for the Medical Center and unrealized gains of approximately $5.4 million for the discrete component units. Investment income of the Foundation includes unrealized gains of $2.0 million and is included in other operating revenue. 30

33 dlb/a Halifax Health Note 4. Deposits and Investment Risk GASB Cod. Sec. 150, Investments, requires disclosures related to investment and deposit risks, including risks related to credit risk, consisting of custodial credit risk and concentrations of credit risk, interest rate risk, and foreign currency risk. GASB Cod. Sec. 150 also requires the disclosure of the credit quality of investments in debt securities, except for obligations of the U.S. Government or obligations explicitly guaranteed by the U.S. Government. Investment Risk: An investment policy was established in order to control and diversify risk by limiting specific security types and/or concentration with individual financial institutions. Specific investment types are limited to a percentage of the total investment portfolio and maximum maturity date. Investment strategies are influenced by relative market yields and the cash needs of Halifax Health. Excess funds of the Medical Center, its component units and its fiduciary fund may be invested in accordance with the respective investment policies. Excess funds may be invested in, but are not limited to: U.S. Government securities and repurchase agreements U.S. Government agency and U.S. Government-sponsored enterprise obligations Domestic bank certificates of deposit provided that any such investments are in Federal Deposit Insurance Corporation guaranteed accounts or deposits collateralized by U.S. Government securities or obligations Securities of, or other interests in, any management-type investment company or investment trust registered under the Investment Company Act of 1940, as amended from time to time, provided that the portfolio of such investment company or investment trust is limited to obligations of the U.S. Government or any agency or instrumentality thereof Repurchase agreements with reputable financial institutions, which are fully secured by U.S. Government obligations All investment decisions are made based on reasonable research as to credit quality, liquidity, and counterparty risk prior to the investment. An investment advisory firm is utilized to monitor the investment of all funds and quarterly performance of the portfolio is reported to management and the Investment Committee of the Board. Custodial Credit Risk: Custodial credit risk is the risk that, in the event of the failure of a depository financial institution, Halifax Health will not be able to recover its deposits. At September 30, 2013, Halifax Health's deposits were covered by federal depository insurance, collateralized with U.S. Treasury Securities and Federal agency securities, or guaranteed 100% by the State of Florida and collateralized through the Florida Bureau of Collateralization. Credit risk: The investment policy provides guidelines to investment managers that restrict investments in debt securities to those with an A- rating or better and established asset allocation limits to reduce the concentration of credit risk. Guidelines are provided to investment managers and monitored by the investment advisory firm and management for compliance. As of September 30, 2013, Halifax Health does not have investments with a single issuer that represent 5% or more of total investments. At September 30, 2013, the money market fund at the Medical Center had a credit rating of Aaa-mf, and other debt securities each had credit ratings of Aaa from Moody's Investors SeNice Inc. 31

34 Note 4. Deposits and Investment Risk (Continued) Interest rate risk: Changes in interest rates can adversely affect the fair value of an investment. Halifax Health manages its exposure to interest rate risk by limiting investment maturities and diversifying its investment portfolios. At September 30, 2013, all investments mature on or before May 15, As of September 30, 2013, the Medical Center had investments and assets whose use is limited maturing as follows (in thousands): Money market funds Mutual funds U.S. Government securities U.S. Government-sponsored enterprise obligations Repurchase agreements Other Total $ Fair Value 29, ,622 16,041 63,018 20,002 4,995 $ 329,469 Less than 1 Year $ 29, ,622 2,229 20,379 4,995 $ 253,016 $ $ 1-5 Years 9,076 34,825 20,002 63,903 $ $ 6-10 Years 4,736 7,814 12,550 At September 30, 2013, all of the investments, restricted assets, and assets whose use is limited of the discrete component units either had maturity dates of less than one year or no maturity date. Note 5. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments: U.S. Government and agency securities, money market and mutual funds are based on quoted market prices at September 30, Common collective trusts are estimated based on quoted market process of the underlying investments at September 30, Repurchase agreements are based on historical value plus a guaranteed rate of return, which approximates fair value. Long-term debt related to bonds payable is reported at historical value. The carrying value at September 30, 2013, is $351.4 million and the fair value at September 30, 2013, is approximately $353.1 million. The fair value of the Swap was approximately $19.3 million at September 30, 2013, as determined by an independent source. The determination is made based on assumptions about the interest rates, the duration of the Swap, cash flow projections, and other factors. See Note 9 for more information about the Swap. 32

35 Note 6. Capital Assets Capital assets are recorded at cost and presented net of accumulated depreciation in the accompanying statements of net position. Projects in progress includes primarily short-term capitalizable projects that were not yet in service as of September 30, No interest related to these projects was capitalized during the year. A summary of the activities for the year ended September 30, 2013, is presented below (in thousands): Medical Center Balance at Balance at September 30, Increases/ Decreases/ September 30, 2012 Transfers Transfers 2013 Capital assets - at cost: Land $ 38,483 $ $ $ 38,483 Land improvements 7, ,483 Buildings 357,927 7, ,620 Fixed equipment 20,217 3, ,g86 Major movea ble equipment 79,837 5,008 3,580 81,265 Computers and software 10,898 4, ,349 Projects in progress 21 '177 18,503 10,924 28,756 Total capital assets- at cost 535,996 37,660 15, ,942 Accumulated depreciation: Land improvements 6, ,488 Buildings 108,044 10, ,328 Fixed equipment 17, ,950 Major moveable equipment 59,598 10,926 5,117 65,407 Computers and software 6,850 2, ,851 Total accumulated depreciation 198,204 24,617 5, ,024 Capital assets - net $ 337,792 $ 13,043 $ 9,917 $ 340,918 Discrete Component Units Capital assets - at cost: Land $ 1,954 $ $ $ 1,954 Land improvements Buildings 48, ,905 Fixed equipment Major moveable equipment 1, ,433 Computers and software Projects in progress ,257 Total capital assets- at cost 52,960 1, ,856 Accumulated depreciation: Land improvements Buildings 15,575 1,261 16,836 Fixed equipment Major moveable equipment 1, ,289 Computers and software Total accumulated depreciation 17,029 1, ,280 Capital assets - net $ 35,931 $ {184~ $ 171 $ 35,576 33

36 Note 7. Self-Insurance and Insurance Self-insurance: The Medical Center is self-insured for various risks of loss, including professional and general liability losses, workers' compensation claims, and employees' health claims. Certain component units participate in the Medical Center's employee health and workers' compensation self-insurance programs. Self-insurance funds are held by a trustee bank and recorded as assets whose use is limited. The Medical Center, as a subdivision of the State of Florida, has sovereign immunity in tort actions. Therefore, in accordance with Chapter , Laws of Florida, the Medical Center and its component units are not liable to pay a claim by or judgment to any one person which exceeds the sum of $200,000 or any claim or judgment, or portions thereof, which when totaled with all other claims or judgments paid by the state or its agencies or subdivisions arising out of the same incident or occurrence exceeds the sum of $300,000. Chapter also provides that judgments may be claimed or rendered in excess of these limits; however, these amounts must be reported to and approved by the Florida Legislature. Professional and general liability losses are recorded w hen it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Accrued self-insurance liabilities include an amount for claims that have been incurred but not reported based on actuarial determinations. Because actual claim liabilities depend on such complex factors as inflation, changes in legal doctrines, and damage awards, the process used in computing claim liabilities does not necessarily result in actual claim amounts. Claims liabilities are reevaluated periodically to take into consideration recently settled claims, the frequency of claims, and other economic and social factors. The liabilities for employees' health insurance and workers' compensation claims are estimated based on historical data. The Medical Center has commercial insurance policies for health insurance and workers' compensation for cases that exceed certain limits. The health insurance policy includes an 80% indemnity of cases that exceed $325,000 and a $1 million lifetime maximum. Specific excess coverage for workers' compensation includes retention of $750,000 per incident. Changes in the accrued self-insurance liabilities are as follows (in thousands): Current Year Balance at Claims and Balance at September 30, Changes in Claim September 30, 2012 Estimates Pa~ments 2013 Employee health $ 2,240 $ 7,671 $ (8,261) $ 1,650 Professional liability 6,830 2,006 (626) 8,210 Workers' compensation 3, (1,303~ 3,409 Total $ 12,880 $ 10,579 $ (10,190~ $ 13,269 Certain matters of litigation against Halifax Health arise in the normal course of business. Losses in excess of amounts accrued may occur although an estimate of such excess cannot be made. It is the opinion of management that the ultimate liability, if any, resulting from these matters will not have a material adverse effect on Halifax Health's financial statements. 34

37 Note 8. Long-Term Debt Long-term debt at September 30, 2013, consists of the following (in thousands): Medical Center Bonds payable, Series 2006 A- net of premium of $1,993 and loss on defeased bonds of $2,272 Bonds payable, Series 2006 B1 & B2 Fixed Rate Conversion- net of discount of $1,611 and loss on refunded bonds of $2,393 Bonds payable, Series 2008 Long-term debt $ 171, ,996 70, ,113 Current portion of long-term debt Long-term debt-less current portion $ 1, ,258 Discrete Component Units Bonds payable, 2010 Series- net of loss on refunding of $318 Long-term notes and other indebtedness Long-term debt $ 9, ,103 Current portion of long-term debt Long-term debt- less current portion $ 2,151 7,952 Bonds payable: The Medical Center previously issued $350 million of debt to refund prior debt and to provide funding for capital projects. The debt is organized with principal balances as follows: $175 million of tax-exempt, fixed-rate bonds ("Series 2006 A"); $105 million of tax-exempt, insured, fixed-rate bonds ("Series 2006 B"); and $70 million of tax-exempt, variable-rate demand-obligation ("VRDO") bonds ("Series 2008"), secured by a letter of credit. Pursuant to the terms of the Master Trust Indenture ("MTI") under which the bonds were issued (excluding conduit indebtedness), principal and interest on each bond series are payable from and secured by a pledge of net revenues of the Obligated Group, which is composed of the Medical Center and Holdings. The Series 2006 A bonds carry interest rates ranging from 5% to 5.38% and have a maximum maturity of June 1, The net proceeds of the Series 2006 A bonds were used to advance refund outstanding indebtedness, convert a line of credit to long-term indebtedness, fund a debt service reserve fund ("DSRF"), and provide funds for capital projects. 35

38 Note 8. Long-Term Debt (Continued) The Series 2006 B bonds are fixed-rate securities insured by Assured Guarantee Municipal Corp. ("AGMC"). The Series 2006 B bonds carry interest rates ranging from 5.38% to 5.50%. The Series 2006 B bonds have maturities extending through June 1, The net proceeds of the Series 2006 B bonds were used to fund a DSRF, to provide funds for future capital projects, and for reimbursement of prior capital expenditures. The Series 2006 B bonds are bifurcated into Series 2006 B- 1 and Series 2006 B-2 bonds. The Series 2008 bonds are tax-exempt, variable-rate securities with a weekly interest-rate period. The Series 2008 bonds have final maturities of June 1, The net proceeds of the Series 2008 bonds were used to advance refund a portion of the Medical Center's outstanding indebtedness, to provide funds for future capital projects, and for reimbursement of prior capital expenditures. The Series 2008 bonds are subject to purchase from time to time at the option of the owners thereof and are required to be purchased in certain circumstances. As such, the bonds are supported by a remarketing agreement and an irrevocable direct pay letter of credit with a bank in the aggregate amount of $70.8 million at September 30, The remarketing agreement generally provides the Medical Center the option to market the obligations at the then-prevailing short-term rate, as determined by the remarketing agent. The obligations were marketed weekly during 2013, with interest rates ranging from.05% to.23%. The term of the letter of credit expires November 17, The letter of credit is secured by an interest in any bonds purchased with draws on the letter of credit and amounts payable under the MTI. The Medical Center did not draw on the letter of credit during In the event that all of the Series 2008 bonds are called for redemption, the Medical Center would be required to draw on the letter of credit. Repayments of principal and interest would begin one year after the date of the draw, and be made in 12 equal quarterly installments and any amounts outstanding at the termination date of the letter of credit would be due and payable at that date. Therefore, the entire outstanding amount drawn on the letter of credit would become due by November 15, Pursuant to the terms of the letter of credit, the Medical Center is required to comply with certain provisions regarding additional borrowings, capital expenditures, and the maintenance of certain financial ratios. The Medical Center has a $70 million notional-amount fixed-pay percentage of the London InterBank Offered Rate ("LIBOR") interest rate swap on the Series 2008 bonds. The variable interest paid on the Series 2008 bonds is expected to correlate very closely with the rate that is received on the related Swap. The effective interest rate on the Swap is a synthetic fixed rate of interest of 3.453% at September 30, See Note 9 for further inform ation on the Swap. The Obligated Group is required to comply with certain provisions regarding additional borrowings and the maintenance of certain minimum debt service coverage, liquidity, and indebtedness ratios, and must maintain DSRFs to pay the principal and/or interest on the respective bond issues in the event that insufficient funding is available to satisfy current debt service requirements. The funds are held by a trustee and any amounts in excess of the requirements of the DSRF can be used to repay outstanding bonds. The Medical Center issued conduit indebtedness in 1998 on behalf of HMS, and refunded that debt with the issuance of the Halifax Hospital Medical Center Health Care Facility Revenue Refunding Bonds (Halifax Management System, Inc. Project) Series 2010 ("Series 201 0") bonds on December 28, The total debt issued was approximately $14.6 million. The Series 2010 bonds are payable solely from, and secured by a pledge of, rental payments to be received from a lease agreement between the Medical Center and HMS. The bonds do not constitute a debt or pledge of the faith and credit of the Medical Center. 36

39 Note 8. Long-Term Debt (Continued) A summary of bond issues follows (in thousands): Fixed Rate Bonds Series Date Issued/ Converted Original Issue Amount Term Bonds Interest Rate Maturity Date Original Issue Amount Serial Bonds Interest Rate Maturity Date Medical Center Series 2006 A June 22, 2006 $ 39,380 46,600 50, % June 1, 2026 $ 38, %-5.25% June 1, June 1, June 1, 2046 Series 2006 B 1 September 18, 2008 Series 2006 B2 September 18, , June 1, , June 1, 2031 HMS Series 2010 December 28, , June 1, 2018 Variable-Rate Bonds Series Date Issued Interest Rate at Original Issue September 30, Amount 2013 Maturity Date Interest Rate Period Medical Center Series 2008 September 18, 2008 $ 70, % June 1, days *This rate is the remarketed interest rate in effect as of September 30, The Medical Center also has a fixed-pay interest rate as part of the Swap. See Note 9 for more information on the Swap. 37

40 Note 8. Long-Term Debt (Continued) Listed below are the debt service payments for the Medical Center and HMS for each of the five years ending September 30, 2014 through 2018, and in five-year increments thereafter (in thousands). The principal shown on the Series 2008 bonds is based on scheduled repayments; however, as described above the principal is subject to call by the bondholders, in which case the principal may be due by The interest rate used to calculate interest on the Series 2008 bonds was the remarketed interest rate in effect at September 30, Series B HMS Series 2010 HMS 2006 Series A Fixed-Rate Conversion 2008 Series (Conduit Indebtedness) Other Principal Interest Principal Interest Principal Interest Principal Interest Principal Interest 2014 $ 1,855 $ 8,944 $ - $ 5,733 $ - $ 49 $ 1,990 $ 261 $ 161 $ ,155 8,851-5, , ,205 8,685-5, , ,495 8,517-5, , ,675 8,334-5, , ,770 37,339-28, ,840 27,826 13,185 28, ,820 22,123 39,810 21, ,770 17,199 52,005 8, ,250 10, , ,620 2, , Total $171,455 $160,874 $105,000 $1 15,603 $ 70,000 $ 1,528 $ 9,620 $ 685 $ 801 $

41 Note 8. Long-Term Debt (Continued) Long-term notes payable and other indebtedness: HMS has a promissory note payable in the amount of $2.3 million to the Medical Center. The note payable is due on a level debt service basis with an interest rate of 5.85%. The outstanding principal at September 30, 2013, was $798,000. Long-term debt activity for the year ended September 30, 2013, consisted of the following (in thousands): Medical Center Series 2006 A Bonds Series 2006 B Fixed Rate Conversion Series 2008 Total Additions (Reductions) Net of Original Balance at Issue Discounts, Balance at September 30, Premium, and September 30, 2012 Loss on Refunding 2013 $ $ 172,734 $ 100,830 70, ,564 $ (1,619) $ 168 (1,451) $ 171, ,998 70, ,113 HMS Series 2010 Other Total $ $ 11 '161 $ ,114 $ (1,859} $ (152) (2,011) $ 9, ,103 Note 9. Interest Rate Swap The Medical Center has previously entered into a Swap agreement with a notional amount of $70 million in conjunction with the issuance of the Series 2008 bonds that effectively converts the variable rate bonds to a fixed rate. Under the terms of the Swap, the Medical Center pays to the counterparty a fixed rate of interest equal to 3.837% of the remaining notional amount. In turn, the Medical Center receives a payment of variable interest equal to 67% of LIBOR. The termination date of this Swap agreement is June 1, 2048, which coincides with the maximum maturity of the Series 2008 bonds. Payments under the Swap agreement are insured by AGMC. For the year ended September 30, 2013, the Medical Center made approximately $2.7 million in payments under the Swap agreement to the counterparty and received approximately $97,000 in payments under the Swap agreement from the counterparty. In accordance with GASB Cod. Sec. 040, the Medical Center applies hedge accounting for its Swap. At September 30, 2013, the fair value of the Swap liability of approximately $19.3 mil lion was included in other long-term liabilities, with the current-year change in fair value of approximately $14.1 million recorded as an increase in deferred outflows in noncurrent assets. The fair value of the Swap is determined by an independent source, based on an analysis of discounted cash flows. Interest rate risk: The Medical Center is exposed to interest rate risk on the Swap. As LIBOR decreases, the Medical Center's net payment on the Swap increases. 39

42 Note 9. Interest Rate Swap (Continued) Basis risk: The Medical Center is exposed to basis risk on the Swap because the variable-rate interest payments it receives on the Swap is based on a rate other than the interest rate the Medical Center pays on its hedged, variable rate debt, which is remarketed every seven days. As of September 30, 2013, the interest rate on the hedged variable-rate debt is 0.07% and 67% of LIBOR is 0.12%. Termination risk: The Medical Center or its counterparty may terminate the Swap if the other party fails to perform under the terms of the agreement. If, at the time of termination, the Swap is in a liability position, the Medical Center would be liable to the counterparty for payment equal to the liability, subject to net settlement. The following table summarizes the Medical Center's anticipated net cash flows from outstanding variable rate debt and the related Swap at September 30, 2013 (in thousands). The interest rates used to calculate interest on the variable rate debt and the variable portion of the Swap were the respective interest rates in effect at September 30, The rate used for the fixed-pay portion of the Swap is the actual interest rate of 3.837%. Years Ending Net Interest Total seetember 30, Princieal Interest on Swae Interest 2014 $ $ 49 $ 2,602 $ 2, ,602 2, ,602 2, ,602 2, ,602 2, ,010 13, ,010 13, ,010 13, ,010 13, , ,381 10, , ,412 4,511 Total $ 70,000 $ 1,528 $ 79,843 $ 81,371 40

43 Note 10. Pension Plan and Other Postemployment Benefits Defined Benefit Pension Plan: Certain employees participate in the Halifax Pension Plan, which is a cost-sharing, multiple-employer, noncontributory defined benefit pension plan (the "Plan") with two participating employers, Staffing and Hospice. The Plan is treated as a single plan for the purposes of making contributions and paying pension benefits, determining whether there has been any termination of service, and applying the maximum benefit limitation. The Plan covers all eligible employees who have attained the age of 21 and have more than one year of service. Eligibility for the Plan was closed to all employees whose initial hire date or rehire date was on or after October 1, Halifax Health assumed the unfunded portion of the past service liability for employees who participated and were not vested in the prior pension benefit programs. Pension plan benefits are based on the number of years of service and the employee's highest three-year average annual compensation. Benefits provisions are established and may be amended by the Board of Staffing, the Plan's Sponsor. The Plan issues stand-alone financial statements that can be obtained by contacting the Plan's sponsor. The Plan's financial statements are prepared using the accrual basis of accounting. In October 2012, the Board of Staffing approved a plan amendment to freeze the further accrual of benefits, effective October 1, In accordance with this amendment, active participants of the Plan will no longer accrue service credits and calculation of benefits, upon eligibility, will be made based on compensation information through October 1, In addition, this amendment allowed participants receiving benefits at that time, and those who are terminated and vested, to elect a cash-out option for an amount equal to the present value of future benefits, as calculated by an actuary. The election period for the cash-out option for those participants was between January 1, 2013, and March 31, 2013, to qualify. There were 786 participants who elected the cash out option, for total benefits paid of $36 million. Those benefits were paid out in April of 2013 and are included in benefits paid directly to participants on the statement of changes in plan net assets. Active vested employees will be given similar cash out options upon eligibility to receive benefits. No other amendments were made to the calculation of benefits for those participants already receiving benefits. Plan assets consist of mutual funds, common collective trusts, and money market accounts. The fair value of individual investments is measured on quoted market prices where available. For certain investments in common collective trusts the fair value is estimated based on the most recent information available regarding the pools' holdings. The Plan had no investments in any one issuer representing 5% or more of net assets at September 30, The Plan is funded in accordance with accepted actuarial practices. The contribution rate is determined on an actuarial basis and contributions are recognized when due. Halifax Health contributes 100% of the minimum recommended amount each year, which was $12.7 million, $24.4 million and $20.7 million for fiscal years 2013, 2012, and 2011, respectively. Such contributions are included in salary and benefits expense. Annual pension cost (and percentage of annual pension cost contributed) for fiscal years 2013, 2012 and 2011 was $25.2 million (50%), $21.8 million (111.8%) and $17.8 million ( %), respectively. Benefit payments are recognized when due to the Plan participants. 41

44 Note 10. Pension Plan and Other Postemployment Benefits (Continued) The Schedule of Funding Progress for the plan as of October 1, 2012, can be found in the Required Supplementary Information immediately following the notes to the financial statements in this annual report. This schedule presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. Information about the actuarial methods and significant assumptions used are presented below: Actuarial Methods and Assumptions Actuarial Cost Method Basis for Measurement of Actuarial Value of Assets Period Traditional Unit Credit Fair Market Value 30 Years Defined Contribution Pension Plan: Eligible em ployees hired on or after October 1, 2000, may participate in a 403(b) defined contribution pension plan (the "Contribution Plan"). The Contribution Plan covers all eligible employees who have attained the age of 18 and have completed 30 days of employment. Employee contributions are matched dollar-for-dollar up to 3% of annual salary. Employees vest 20% per year of employment for employer matched funds. Total cost of the Contribution Plan for the year ended September 30, 2013, was approximately $2.8 million and is included in salaries and benefits in the accompanying statements of revenues, expenses, and changes in net position. Participants contributed approximately $5.8 million to the Contribution Plan for the year ended September 30, Other Postemployment Benefit Plans: Qualified retired employees are eligible for certain postretirement benefit plans other than pensions ("OPEB"). All employees with ten years of benefited service as a participant in the Halifax Pension Plan or the Florida Retirement System are eligible to receive a subsidy for health insurance premiums ("Insurance Subsidy OPEB"). The Insurance Subsidy OPEB is a multi-employer defined benefit plan. The participant must present, at the time of retirement, evidence of health insurance coverage, either through an insurance company or Medicare. The Insurance Subsidy OPEB is calculated based on the number of years of service and is limited to a maximum annual benefit of $1,800 per participant. The Insurance Subsidy OPEB does not issue standalone financial statements. It is included in the financial statements and required supplementary information of the Medical Center. The following table shows the components of the annual Insurance Subsidy OPEB cost for the year ended September 30, 2013 (in thousands). ARC and Annual OPEB Cost ARC Plus interest on net OPEB obligation Less adjustment to annual required contribution Annual OPEB cost Contributions made Increase in net OPEB obligation Net OPEB obligation: Beginning of year End of year 42 $ $ 1, (242) 1,218 (577) 641 4,188 4,829

45 Note 10. Pension Plan and Other Postemployment Benefits (Continued) Benefits for participants are funded from contributions made by Halifax Health, on a pay-as-you-go basis. The annual Insurance Subsidy OPEB cost for fiscal year 2012 is approximately $1.2 million. The net OPEB obligation was $4.8 million as of September 30, 2013, and is included in other liabilities on the accompanying statements of net position, respectively. The percentage of OPEB cost contributed during fiscal year 2013 was 47%. The annual cost history for the Insurance Subsidy OPEB plan is summarized below (dollars in thousands): Years Ending Seetember 30, OPEB Cost 2013 $ 1, , ,148 Percent of OPEB Cost Net OPEB Contributed Obligation 47% $ 4, ,188 3,456 Additional information as of the latest actuarial valuation follows: Valuation date Actuarial cost method Amortization method Remaining amortization period October 1, 2012 Projected unit credit Level dollar amounts 27 years, closed Actuarial assumptions: Investment rate of return 4% These actuarial assumptions are based on the presumption that the Insurance Subsidy OPEB will continue. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Calculations are based on the benefits provided under the terms of the substantive plan as of the valuation date and on the sharing of costs between the employer and plan members as of that date. In addition, assumptions on employee withdrawal and retirement rates were used. Mortality is assumed to follow the 1994 Group Annuity Mortality Table (sex-distinct), with projection to Information about the funded status of the Insurance Subsidy OPEB plan from the most recent actuarial valuation is as follows {dollars in thousands): Actuarial UAAL as a Actuarial Actuarial Accrued Percent of Valuation Value of Liability Unfunded Funded Covered Covered Date Plan Assets {"AAL"} AAL {"UAAL"} Ratio Pa:troll Pa:troll October 1, 2012 $ $ 16,681 $ 16,681 0% $ 51,283 33% 43

46 Note 10. Pension Plan and Other Postemployment Benefits (Continued) Health insurance is also offered to certain retirees at the same cost as active employees, in a benefit plan called the "Implicit Rate Subsidy OPES," a single-employer defined benefit OPEB plan. The Implicit Rate Subsidy OPES is offered through the Halifax Health Plan, which provides medical care and prescription drug coverage to full-time employees and specified part-time employees. The Implicit Rate Subsidy OPES does not issue stand-alone financial statements. It is included in the financial statements and required supplementary information of the Medical Center. The following table shows the annual Implicit Rate Subsidy OPES cost and change in OPES obligation for the year ended September 30, 2013 (in thousands): Annual OPEB cost Contributions made Increase in net OPEB obligation $ 691 (429) 262 Net OPES obligation: Beginning of year End of year $ 2,604 2,866 Benefits for participants are funded from contributions made by Halifax Health and plan members on a pay-as-you-go basis. The cost of the plan is a blended rate of active employees and retirees. Retired employees contribute both the employee and employer rates, but do not pay a separate rate based solely on retiree costs to the plan. Therefore, this OPES provides an implicit rate subsidy to retirees in the plan. The annual Implicit Rate Subsidy OPES cost for fiscal year 2013 is approximately $691,000. The Implicit Rate Subsidy OPES obligation was $2.8 million as of September 30, 2013, and is included in other liabilities in the accompanying statements of net position. The percentage of OPES cost contributed during fiscal year 2013 is 62%. The annual cost history for the Implicit Rate Subsidy OPES plan is summarized below (dollars in thousands): Percent of Year Ended OPES OPES Cost Net OPES Se~tember 30, Cost Contributed Obligation 2013 $ % $ 2, , ,048 44

47 Note 10. Pension Plan and Other Postemployment Benefits (Continued) Additional information as of the latest actuarial valuation follows: Valuation date Actuarial cost method Amortization method Remaining amortization period October 1, 2012 Projected unit credit Level dollar amounts 27 years, closed Actuarial assumptions: Investment rate of return Healthcare trend rate -first year Healthcare trend rate -following 10 years 4% 9% 5% These actuarial assumptions are based on the presumption that the Implicit Rate Subsidy OPEB will continue. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Calculations are based on the benefits provided under the terms of the substantive plan as of the valuation date and on the sharing of costs between the employer and plan members as of that date. In addition, assumptions on employee withdrawal and retirement rates were used. Mortality is assumed to follow the RP-2000 Mortality Table for active and retired males and females with mortality projection scale AA to the year of valuation. Information about the funded status of the Implicit Rate Subsidy OPEB plan from the recent actuarial valuation is as follows (dollars in thousands): Actuarial UAAL as a Actuarial Actuarial Accrued Percent of Valuation Value of Liability Unfunded Funded Covered Covered Date Plan Assets {"AAL"} AAL {"UAAL"} Ratio Pa:troll Pa:troll October 1, 2012 $ $ 6,649 $ 6,649 0% $ 51,283 13% Schedules of funding progress regarding both OPEB plans are included in the required supplementary information section of the financial statements and presents information about whether the value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. 45

48 Note 11. Deferred Gift Annuity Plan As part of the Foundation's planned giving program, the Foundation has established a Deferred Gift Annuity Plan (the "Annuity Plan"). Annuity Plan participants make monthly contributions to the Annuity Plan for a specified time period. Contributions are used to purchase commercial annuity contracts and life insurance policies owned by the Foundation. An asset is recorded as of September 30, 2013, in the amount of approximately $322,000 that represents the cash surrender value of the life insurance policies and annuity contracts purchased, respectively. In addition, a liability is recorded as of September 30, 2013, for approximately $328,000, which represents the present value of the annuity payments promised to the participants in the Annuity Plan by the Foundation. At September 30, 2013, the Annuity Plan had five participants. The Foundation had deferred benefits totaling approximately $322,000. This represents life insurance death benefits purchased on the lives of the participants and is contingent upon the consistent payment of premiums under the contracts. Note 12. Charitable Gift Annuities The Foundation has received contributions from various donors in the form of charitable gift annuities. In consideration of the charitable gift, the Foundation agrees to make annuity payments to the donor for the remainder of the donor's life, and a liability equal to the estimated present value of these annuity payments, approximately $1.7 million, is recorded in other liabilities in the accompanying statements of net position. The Foundation calculates the present value using the donors' expected life and a discount rate of 7.5%. Note 13. Commitments and Contingencies Leases: Halifax Health is committed under va rious noncancelable operating leases. These expire in various years through Future minimum operating lease payments are as follows (in thousands): Years Ending September 30, Total minimum lease payments required $ $ 6,928 5,327 4,290 4,073 3,808 3,216 27,642 Contingencies: The health care industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in significant fines and penalties, including repayments for patient services previously reimbursed. 46

49 Note 13. Commitments and Contingencies (Continued) In December, 2009, the Office of Inspector General (OIG), U.S. Department of Health and Human Services ("the Government") informed the Medical Center that it was conducting an investigation of the Medical Center concerning certain claims that were submitted to Medicare. The Medical Center subsequently learned that the Government's request arose from a qui tam action, for which the Government filed its formal complaint on November 4, 2011, intervening in some of the qui tam whistleblower's allegations but not others. The Government's complaint alleges that the Medical Center violated the Stark Law in its compensation of certain neurosurgeons and medical oncologists. The qui tam whistleblower is independently pursuing the non-intervened claims. The Medical Center routinely enters into compensation agreements with physicians to ensure that the medical needs of the community are met. Such compensation agreements are evaluated on a variety of factors, including fair market value of compensation, and all agreements are subject to an internal legal review. Management of the Medical Center believes these physicians were compensated at a fair market rate and that the agreements were commercially reasonable. The Stark Law was enacted to prevent compensating physicians based on referrals for certain designated health services unless certain conditions apply. The Medical Center hired these neurosurgeons and medical oncologists as employees, which are specifically exempt from the Stark Law enforcement so long as their compensation is based on fair market value, commercially reasonable and meets the requirements of applicable Stark Law exceptions. The Medical Center also engaged a national law firm that specializes in Stark Law issues to review these contracts. That law firm verified that the medical oncologists' compensation agreements were in compliance with the Stark Law and provided the Medical Center with a written report to that effect. Recently, the Court partially granted the Government's motion for partial summary judgment in ruling that the medical oncology agreements violated the Stark Law. Even though the Court ruled that the medical oncology agreements violated the Stark Law, the Court declined to assess any damages and denied the Government's motion for summary judgment on its False Claims Act claim. The Medical Center believes its defenses are meritorious, and is weighing its options to appeal the Court's ruling. The Court also recently denied the qui tam whistleblower's motion for a summary judgment. The Court's ruling had no affect on the Government's claims regarding the neurosurgeon agreements. Management believes that the neurosurgeons named in the claim received compensation that was based on fair market value, commercially reasonable, and complied with the Stark Law. The probability of a favorable or unfavorable outcome on either the Government's claims regarding the neurosurgeon agreements or the Relator's non-intervened claims is unknown. While the Medical Center believes its defenses are meritorious, the ultimate resolution could adversely affect the Medical Center's financial condition, results from operations, or cash flows. The Government's complaint seeks damages up to $1.14 billion. The whistleblower's most recent pleadings seeks damages in th e amount of approximately $81 million for which the Government has not intervened. Management of the Medical Center disagrees with the calculation of damages, and believes that, should any damages be assessed, they would be less than those sought by the Government and the whistleblower. A trial date on the remaining claims is currently scheduled for March Any attempts to negotiate a settlement prior to trial would be strictly for the purpose of minimizing the legal expenses associated with defending this claim, and not an admission of wrongdoing by the Medical Center. Expenses paid to outside firms to assist in the defense of this claim since its inception are in excess of $16 million, $8 million of which was paid during the fiscal year ended September 30,